Economics

Game theory

Incredible threats

EZRA KLEIN quotes Speaker of the House John Boehner, in a speech on the debt limit:

Without significant spending cuts and reforms to reduce our debt, there will be no debt limit increase. And the cuts should be greater than the accompanying increase in debt authority the president is given. We should be talking about cuts of trillions, not just billions.

Also, tax increases of any sort are off the table. How should Democrats respond? Well, no would be one option. No won't be the answer, because Democrats need to signal seriousness on fiscal issues and because most of them want to work some deficit-reduction plans into the deal to raise the limit, but no could be the option. Mr Boehner cannot actually allow the country to default, without going down as one of American history's greatest economic villains. He's said as much. Which makes his bargaining position here somewhat untenable.

At the same time, I'm not sure what the equilibrium here is. My sense is that backward induction takes us to a world in which the adminstration gets the cuts it wants and no more. Read this way, Mr Boehner's statement yesterday may be a gambit to get Democrats to shift what they're prepared to accept in his direction. Why would they do that? I'm not sure, and so it may not work. Alternatively, Mr Boehner's message is an attempt to move public opinion, part of a long game in which Republicans try to convince the electorate that major budget cuts are an absolute necessity and Democratic efforts to convince them that they aren't are unserious and irresponsible.

Either way, it still seems certain that the debt ceiling will be raised.

The other weakness in Mr. Boehner's approach is that he may convince his existing supporters that he is more unmoving that he actually intends to be. Which could get him significantly more negatives from them, when he finally does act sanely, than he will get from the (notional) shift in overall public opinion his way.

As a game theory approach, that would seem to leave a lot to be desired.

Boehner's admitted that he wants the debt ceiling raised, so "no" is absolutely the right answer here. If he's willing to take the government's credit rating hostage, the Dems should respond by refusing to negotiate. If he wants more spending cuts, he should put them in the 2012 budget.

I don't understand what the Republican endgame here is. If they want to cut trillions off the budget, they'll need to go after Medicare and Social Security. That sounds fine on a Sunday talk show and when you propose hypothetical budgets that grandfather everyone in for the next 15 years, but if they're actually successful, do they not think they'll face an almost violent backlash from voters?

I remain convinced that much of the government spending animus the Tea Party generates is based upon the idea of ensuring that the government will have enough money to pay the Baby Boomers’ Medicare and Social Security claims, and is not an effort to destroy these very programs.

Threats are a very poor way of negotiating anything. The debt ceiling needs to be raised-we all know that. But the correlation with the government deficit and government spending growth since the turn of the century isn't as strong as some would like you to believe. The deficit is what it is not because of excessive federal discretionary spending, but because tax revenues are down from a severe economic shock, two or more wars (who bothers to count anymore?), additional aid to the unemployed and food-insecure, etc. Including trillions of cuts to the federal budget will only amplify the devastating cuts many states are making to their budgets in a time of weak growth. Meanwhile, the markets are not overly concerned with federal debt as evident by low interest rates. Basically, make the debt ceiling fight about the debt ceiling, and put spending and tax revenues in their own forum.

The Republicans' multi-decade track record of irresponsible spending and tax cuts trumps even that of the Democrats'. Their sudden coming to Jesus on the country's finances, while out of power, is the lowest form of cynicism known to man.

While I think what Boehner's doing is wrong, it's a great move for him politically. If he can take a situation where he has zero leverage and still get Democrats to give him concessions, then he's done a good job achieving a political goal. I'd prefer it if the Speaker of the House were more serious about improving policy than scoring points, but I'm weird like that.

doug374, I really don't agree that "the government spending animus the Tea Party generates is based upon the idea of ensuring that the government will have enough money to pay the Baby Boomers’ Medicare and Social Security claims." Because I don't think they have admitted to themselves that the Baby Boomers' Medicare and Social Security will take a significant part of the government's spending.

Rather, it seems to be based on the delusion that what government spending mostly goes for is programs that the Tea Partiers dislike on other grounds. (Try telling them what the governments' spending currently goes for and you will be greeted with denunciations for lying.) The current financial mess is merely a handy excuse to flog their favorite prejudices.

The cynical side of me says that the Republicans are playing electoral politics here with an eye toward 2012. They are shouting that govt debt is bad, adding to the debt is worse, and that those irresponsible Democrats are forcing the Republicans to increase the debt ceiling. Of course the debt ceiling will be raised because it's what needs to be done, but the Republicans will use this as an opportunity blame those tax-and-spend Democrats.

Similarly, I suspect that Republican call to slash govt spending despite the weak economy is only for political gain. If the Dems are able to avoid severe cuts, the Republicans will say they aren't serious about the debt. But if the Dems go for the cuts, it might push the country back into recession during the 2012 election campaign season, which would greatly benefit the Republicans.

That's my point though. They think Medicare and SSI are say 40% of government expenditures, and if we weren't spending so much money on foreign aid, Planned Parenthood, ACORN and bureaucratic inefficiency, there wouldn't be so many reports of crises in funding these programs.

In other words, their failure to "[admit] to themselves that the Baby Boomers' Medicare and Social Security will take a significant part of the government's spending" is the reason that they suffer from "delusion [as to] what government spending mostly goes for."

They get angry because when you correct them, you imply just how complicated this problem is, and many of them were planning on dying before the country had to go down that rabbit hole.

This item seems to embrace the simplistic idea that the Democrats "tax and spend" and the Republicans are for fiscal responsibility and low taxes. The reality is more complicated than that. The US National Debt began to be a serious problem in 1982, the year of the first (Republican) Reagan budget, who combined greatly increased military spending with low taxes. The trend continued through two Reagan terms and one of his successor, George H. w. Bush, by which time the debt had doubled relative to GDP. It went down relative to GDP during the (Democratic) Clinton administration, then back up again sharply during the (Repulican) administration of the second Bush. This linked graph shows this trend: http://zfacts.com/p/1195.html

When Republicans talk about spending cuts, it is often about things like Pell Grants, or other social programs which contribute only a tiny amount to the budget. The discretionary budget is dominated by military spending, and can only be cut by trillions by cutting military spending. The Democrats have made significant cuts in military spending by, for example, reducing the size of the F-22 fighter procurement.

The substantive disagreement between the Democratic and Republican parties is not about whether to cut spending, but about which programs to cut.

The issue gets more complicated when Social Security Insurance (retirement and disability) is considered. These are legally "off budget" meaning that they are funded through special taxes earmarked for the purpose, and managed separately from the rest of the budget. In practice, however, SSI is often lumped with everything else when discussing the budget. This is because SSI has a surplus. The Social Security Administration invests this surplus in Treasury securities (national debt), and this part of the debt can be hidden inside the lumped budget. Some (generally Republicans) want to solve the budget problem created by military spending by cutting Social Security benefits, using the surplus which was intended to fund the retirement of the "baby boom" generation, just now reaching retirement age.

It's a sorry mess and it's been developing for thirty years. The problem cannot be fixed in one four-year presidential term, but you can count on the Republicans in Congress to put as much blame as they can get away with on the current Democratic president.